One of the main features of investing is “making a decision”. This means you have to take decisions based on information regarding where, when, how much and for what time to invest. Often these decisions are based on what you think and your emotional response. This is called Behavioral Finance. The study has revealed Top 20 Behavioral Biases in Investing Decision Making, a person suffers while making a decision.

This article is a collection of 20 cognitive biases. Yes, 20 and there may be many more discovered or undiscovered. The aim is to identify and work on our weaknesses arising due to these behavioral biases.

So here is the list of 20 main Behavioral Biases that are known to me:

Anchoring Bias

People are over-reliant on the first piece of information they get. For eg “A golden opportunity near upcoming airport”. The investor is more inclined because of the news that an airport is coming. When? Is it really proposed? Is it cleared by authorities? No consideration.

Choice- Supportive Bias

When you choose something, you tend to feel positive about it, even it has a flaw. You recommend it to your group and family just to prove how right you are.

Information Bias

It is a tendency to seek more and more information to proceed or reject a choice. You call up relevant or non-relevant people, discuss at length, use google to get the desired information. Too much information is also not necessary. Adequate information is enough to make financial decisions.

Placebo Effect

This bias means when you simply believe that something will have a certain effect and you make that effect because you believe so. You feel equity can only help you reach your goals. Now, this may be true but suddenly you forget other things and start taking interest in equities. You even buy it without knowing much. It is quite common in medicine. If you believe in some specific doctor, whatever medicine he gives you, you feel better.

Availability Heuristic

Under this behavioral biases, one overestimates the importance of the available information. You feel this is the most critical information that you have received. You know how Waren Buffet made his wealth and he still has his fries & coke. So you start following his diet. That may not work for you here.

Clustering Bias

You see patterns in the random event which are not related. You combine them to support your thinking or action. For eg., There is a terrorist incident on the border and you connect it with defense stocks and take a large position.

Ostrich Effect

This is a tendency when the decision maker willfully ignores the dangerous and related information to support his position. Like the name of the bird, it is hiding from the reality and not accepting anything against.

Pro-innovation Bias

When you overvalue a new trend or an idea. You purposely ignore the limitations or shortcomings. You feel positives will be sufficient to run this idea. This is lacking the balanced approach. Remember the IT bubble of 2000-01.

Stereotyping

You assume the good qualities of an investment or an idea without having any information about it. You make your mind so positive that the new idea seems to be old and you look like an expert. If you are so positive already that investment becomes your weakness.

Selective Perception

It is related to stereotyping but here we put our expectations on what we perceive. We mix our thinking with the information we receive and bend it as per our thinking.

Bandwagon Effect or Herd Mentality

You enter a meeting room with your own thoughts about an issue. But in the meeting you see majority supporting the opposite view. The company leader gives an effective talk and people are supporting him. This changes your thinking too. You go with the group because you think the majority cannot be wrong or standing with the majority is a comfortable position.

Confirmation Bias

We tend to hear only things which confirm what our perception is. If I have made up my mind to invest in a certain company, I will hear only the positive things. I will switch TV channel when the expert puts the opposite view or talks about risk factors.

Outcome Bias

Your current success becomes deciding factor for all the future decisions. You earned a handsome return from a stock by fluke, now you feel the stock market is so easy to manipulate. You start day trading with large sums in that stock because you feel you know that stock.

Recency Bias

The tendency to only use the latest information and ignoring the history is recency bias. This can widely be understood by the fact that many investors just invest in equity fund with one-year performance. They feel that winner today will always be a winner even though, the disclaimer says “past performance is not an indicator of future performance”.

Survivorship Bias

You just take the positivity of a situation. Many people leave jobs and leap into being an entrepreneur just to be “their own boss”. You think that business is an easy thing as you have not heard any one complaining of freedom. There are many aspects to become a businessman and challenges too. But you ignore since no one talks about the hardship.

Blind Spot Bias

You feel you are perfect and above from all biases. A false feeling of being a balanced person is a bias in itself. There is nothing called a perfect person forever. Scopes to learn and relearn is always there and makes you a better decision maker.

Conservatism Bias

It is opposite of recency bias. You tend to be in history and ignore the latest developments. The classic case is of Satyam when investors did not sell it for the previous glory. Many investors still hold delisted stocks. Many still invest in LIC endowment plans and Bank FD.

Overconfidence Bias

Some investors are so overconfident about their views regarding investment world. This makes them take greater risks. Very often the so called experts suffer from this bias. Their success or fan following goes into their head and they feel themselves a god of markets.

Salience Bias

Here the investor focus on what he has heard or read about a concept. Many people refrain from equity because they have heard that it leads to bankruptcy and suicide incidents. They continue investments in debt or low yielding securities and blame the government.

Zero Risk Bias

Suppose you have 2 options to choose. One is to make 13%-18% returns in 15 years by investing in equity Mutual Fund. Not fixed but a healthy range. The second option is a bond for 15 years with a coupon of 9%. Many people will take the second option for their love of “Certainty”. Many investors want to know beforehand and fix what they will earn. They do not want to live in an uncertain world even though 9% is taxable and equity mutual fund returns are tax efficient.

Do you suffer and encountered any of these biases or their symptoms? Hopefully, now you will be more careful.

Share your views and make aware of these biases to your family and friends by sharing this article on social media.

Summary

Article Name

20 Behavioral Biases In Investing

Description

Investment is not a number game, it is a mind game. The mind gets manipulated by behavioral biases in investing decision making.

WealthWisher Financial Advisors (Also referred as The wealthwisher.com or TW2) is an Advice platform, where we help an individual, managing personal finance in easy and smart manner & taking informed decision . The person managing WealthWisher Financial Advisors Mr. Madhupam Krishna is a SEBI registered Advisor. Post advise, one can execute transactions with your banker, stock broker or agent/ financial intermediary. We also offer transaction services through various associations, at a substantially lesser cost to our clients, as compared to other financial intermediaries, so that you start your financial plan with savings. WealthWisher Financial Advisors may earn commission or distributor incentives for providing transaction services or referring customers with third party service providers as per customer’s agreement.
Our recommendations rely on historical data. Historical/ past performance is not a guarantee of future returns.
The information and views presented here are prepared by WealthWisher Financial Advisors. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. This document is solely for the personal information of the recipient. The products discussed or recommended here may not be suitable for all investors. Investors must make their own informed decisions based on their specific objectives and financial position and using such independent advice, as they believe necessary.
While acting upon any information or analysis mentioned here, customers may please note that neither WealthWisher Financial Advisors nor any person connected with any third party companies or service providers of WealthWisher Financial Advisors, accepts any liability arising from the use of this information and views mentioned here. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an action. Stocks in the equity portfolios are filtered at various levels. Initially, the stocks are filtered on the basis of the size of the company and the sector of the company. The company's fundamental parameters are tested using various parameters related to inventory days, employee cost, power cost, taxation etc. Finally, the volatility in the price performance as well as the future growth prospect is viewed and accordingly the stocks are classified in various portfolios. While building Mutual funds portfolio, factors like size of the funds, the historical performances (return) of the schemes, expenses ratio ,the sector in which the scheme invests and volatility are considered.